<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K/A
----------
Amendment to
FORM 8-K
as originally filed on
August 21, 1996 and as amended October 21, 1996
Amendment to
Current Report Pursuant
to Section 13 of 15(d) of the
Securities Exchange Act of 1934
August 6, 1996
(Date of earliest event reported)
SAFETY COMPONENTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-23938 33-0596831
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
3190 Pullman Street
Costa Mesa, California
(Address of principal executive offices)
92626
(Zip Code)
Registrant's telephone number, including area code (714) 662-7756
1
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements
Exhibit 1:
Predecessor Financial Statements:
Phoenix AG's Airbag Division
Report of Independent Accountants
Balance Sheet as of December 31, 1995
Statement of Operations and Retained (Deficit) Earnings for the Year
Ended December 31, 1995
Cash Flow Statement for the Year Ended December 31, 1995
Notes to the accounts
Exhibit 2: (previously filed with Form 8-K/A dated October 21, 1996)
Predecessor Financial Statements:
Phoenix Airbag GmbH
Report of Independent Accountants
Balance Sheet as of August 5, 1996
Statement of Operations and Retained Earnings for the Period from
January 1, 1996 through August 5, 1996
Statement of Cash Flows for the Period from January 1, 1996 through
August 5, 1996
Notes to the Financial Statements
Exhibit 3:
Successor Basis Financial Statements:
Phoenix Airbag GmbH & Co. KG
Report of Independent Accountants
Balance Sheet as of December 31, 1996
Statement of Operations and Retained Earnings for the Period from
August 6, 1996 through December 31, 1996
Statement of Cash Flows for the Period from August 6, 1996 through
December 31, 1996
Notes to The Financial Statements
(b) Pro Forma Unaudited Financial Information
The unaudited pro forma condensed combined balance sheet of Safety
Components International, Inc. (Safety Components) and Phoenix Airbag GmbH
(Phoenix Airbag) as of June 30, 1996 reflect adjustments as if the acquisition
had taken place on June 30, 1996. The unaudited pro forma condensed statement
of operations for the three months ended June 30, 1996 and for the then most
recent fiscal year ended March 31, 1996, reflect adjustments as if the
acquisition of Phoenix Airbag had occurred on April 1,1995, the beginning of
Safety Component's fiscal year. The acquisition is being accounted for using the
purchase method.
The financial statements of Safety Components are based on its fiscal year
ending March 31. The financial statements of Phoenix Airbag are based on a
calendar year basis. In order to present the pro forma condensed combined
financial statements based on Safety Components' fiscal year ended March 31,
1996, Phoenix Airbag's quarterly results for its calendar quarter ended March
31, 1995 are being excluded, while the quarterly results for its calendar
quarter ended March 31, 1996 are being included for the conversion to Safety
Components' fiscal year end. For the three months ended June 30, 1996, Phoenix
Airbag's quarterly results for the second quarter of calendar 1996 are included.
In management's opinion, the inclusion of this conversion of Phoenix Airbag's
calendar year end statements for the periods being presented are necessary to
properly reflect the historical results of operations included in the pro forma
condensed combined financial statements.
Pursuant to the Stock Purchase Agreement, 80% of Phoenix AG's interest in
Phoenix Airbag was acquired
2
<PAGE>
by Safety Components on August 6, 1996 for an initial purchase price of $20
million, subject to a net worth adjustment. Additional purchase price
consideration of up to approximately $7.5 million for the remaining 20% percent
interest is contingent on Phoenix Airbag meeting certain performance targets
during calendar years 1996 through 1998. If the annual targets are met, payments
will be paid annually commencing April 30, 1997. Although Safety Components will
acquire the remaining 20% interest effective December 31, 1998, it is entitled
to 100% of the income or losses, of Phoenix Airbag commencing August 6, 1996.
Accordingly, all assets and liabilities were reflected at fair value at the date
of acquisition, and no minority interest was recorded in the Phoenix Airbag's
balance sheet for Phoenix AG's remaining 20% interest.
The unaudited pro forma condensed combined financial statements reflect
Safety Component's allocation of the purchase price, including transaction
costs, of approximately $22 million to the assets and liabilities of Phoenix
Airbag based upon Safety Components appraised values of the relevant assets
acquired and liabilities assumed. The final allocation of the purchase price may
vary as additional information is obtained, and accordingly, the ultimate
allocation may differ from those used in the unaudited pro forma condensed
financial statements. Such final allocation is not expected to be materially
different.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the separate historical financial statements and
related notes of Phoenix AG's Airbag Division, Phoenix Airbag GmbH (previously
filed with amendment A) and Phoenix Airbag GmbH & Co. KG appearing in Item 7 (a)
of this current report on Form 8-K and the historical financial statements,
related notes and Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations of Safety Components for the year
ended March 31, 1996 and for the three-month period ended June 30, 1996,
previously filed with the Securities and Exchange Commission. The pro forma
information is not necessarily indicative of the results that would have been
reported had the acquisition actually occurred on the dates specified, nor is it
necessarily indicative of the future results of the combined companies.
3
<PAGE>
Safety Components International, Inc. and Phoenix Airbag GmbH
Unaudited
Pro Forma Condensed Combined Balance Sheet
June 30, 1996
(In 000's)
<TABLE>
<CAPTION>
Pro Forma
Safety Phoenix Adjustments Combined
Components Airbag Note 2 Pro Forma
---------- ------- ------------ ---------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 5,461 $ 0 $ 5,461
Accounts receivable 15,965 4,250 105 (a) 20,320
Inventories 5,091 1,417 32 (a) 6,540
Prepaid expenses 2,137 12 2,149
------- ------ ------ -------
Current assets 28,654 5,679 137 34,470
Fixed assets, net of accumulated
depreciation 13,958 3,053 3,741 (a) 20,752
Intangible assets, goodwill and patents 0 12,130 (a) 12,130
Other assets 4,525 0 (2,095)(a) 2,430
------- ------ ------ -------
Total Assets $47,137 $8,732 $13,913 $69,782
======= ====== ======= =======
Liabilities and stockholders equity
Accounts Payable $ 4,969 $ 609 $ 5,578
Accrued expenses 655 1,679 (419)(a) 1,915
Income taxes payable 600 600
Due to Phoenix AG 176 176
Current portion of long term obligations 734 0 4,250 (a) 4,984
------- ------ ------ -------
Current liabilities 6,358 3,064 3,831 13,253
Long-term obligations 3,264 0 3,264
Other long-term liabilities 1,579 0 15,750 (a) 17,329
------- ------ ------ -------
Total Liabilities 11,201 3,064 19,581 33,846
Stockholders' equity 35,936 5,668 (5,668)(a) 35,936
------- ------ ------ -------
Total Liabilities and
stockholders' equity $47,137 $8,732 $13,913 $69,782
======= ====== ======= =======
</TABLE>
4
<PAGE>
Safety Components International, Inc. and Phoenix Airbag GmbH
Unaudited
Pro Forma Condensed Combined Statement of Operations
For The Three Months Ended
June 30, 1996
(In 000's except Earnings Per Share)
<TABLE>
<CAPTION>
Pro Forma
Safety Phoenix Adjustments Combined
Components Airbag Note 1 Pro Forma
---------- ------- ------------ ---------
<S> <C> <C> <C> <C>
Net sales $16,172 $9,305 $25,477
Cost of sales 13,580 6,977 (50)(e) 20,507
------- ------ ----- -------
Gross profit 2,592 2,328 50 4,970
------- ------ ----- -------
Selling, general and administrative
expenses 1,146 1,072 125 (f) 2,343
------- ------ ----- -------
Operating income (loss) 1,446 1,256 (75) 2,627
Other expense (income) 64 64
Amortization of intangibles 142 (b) 142
Interest income 88 88
Interest expense 98 450 (a) 548
------- ------ ----- -------
Income (loss) before income taxes 1,372 1,256 (667) 1,961
Provision (benefit) for US income taxes 519 (171)(c) 348
Provision (benefit) for German taxes 718 (283)(d) 435
------- ------ ----- -------
Net income (loss) $ 853 $ 538 ($213) $ 1,178
======= ====== ===== =======
Earnings per common and common
equivalent share $0.17 $0.23
======= =======
Weighted average common and
common equivalent shares 5,069 5,069
======= =======
</TABLE>
5
<PAGE>
Safety Components International, Inc. and Phoenix Airbag GmbH
Unaudited
Pro Forma Condensed Combined Statement of Operations
For The Year Ended
March 31, 1996
(In 000's except Earnings Per Share)
<TABLE>
<CAPTION>
Pro Forma
Safety Phoenix Adjustments Combined
Components Airbag Note 1 Pro Forma
----------- ------- ------------ ----------
<S> <C> <C> <C> <C>
Net sales $94,942 $33,176 $128,118
Cost of sales 81,908 26,519 (200)(e) 108,227
------- ------- ------ --------
Gross profit 13,034 6,657 200 19,891
------- ------- ------ --------
Selling, general and administrative
expenses 5,430 3,082 450 (f) 8,962
------- ------- ------ --------
Operating income (loss) 7,604 3,575 (250) 10,929
Other expense (income) (229) 0 (229)
Amortization of intangibles 574 (b) 574
Interest income 578 578
Interest expense 381 1,800 (a) 2,181
------- ------- ------ --------
Income (loss) before income taxes 8,030 3,575 (2,624) 8,981
Provision (benefit) for US income taxes 3,116 (698)(c) 2,418
Provision (benefit) for German taxes 1,869 (949)(d) 1,094
------- ------- ------ --------
Net income (loss) $ 4,914 $ 1,706 ($977) $ 5,469
======= ======= ===== ========
Earnings per common and common
equivalent share $0.99 $1.10
======= =======
Weighted average common and
common equivalent shares 4,981 4,981
======= =======
</TABLE>
6
<PAGE>
Pro Forma Financial Statements
Note 1 - Safety Components and Phoenix Airbag Reporting Periods for the Three
Months Ended June 30, 1996 and for the Year Ended March 31, 1996
a) To reflect the increase in interest expense arising form the
borrowing of $20 million, for the purchase of Phoenix Airbag,
interest is assumed to be at Safety Components effective
borrowing rate of 9% per annum.
b) To reflect the amortization of goodwill of approximately $9.1
million, which is being amortized over a twenty-five year period
(previously reported in the Company's pro forma financial
statements an estimated life of fifteen years) and the
amortization of patents of approximately $3 million over fifteen
years, the estimated useful life of the patents. The goodwill
amount represents the current estimate of the excess of purchase
price over the relative values of the assets acquired and
liabilities assumed. The Company believes that the goodwill
associated with the purchase of Phoenix Airbag has an associated
life of twenty-five years. The reason that the Company has
selected a twenty-five year useful life for goodwill is based
upon the fact that Phoenix Airbag is a highly automated, high
volume sewing operation dealing in petroleum based fabrics.
Phoenix Airbag has the ability to sew a large variety of
alternative fabrics, including cotton and wool products, in a
long established industry. Please refer to the Phoenix Airbag
financial statements for the period ended December 31, 1996,
included in this Form 8-K/A, for management's policy assessing
the recovery of goodwill and patents through operations.
c) To reflect the income tax effect of the pro forma adjustments
calculated at applicable federal and state statutory rates,
resulting in an effective tax rate of thirty-nine percent.
d) To reflect the income tax effect of the pro forma adjustments
and applicable tax structure as a result of the purchase of
Phoenix Airbag calculated at applicable German corporate and
local trade taxes statutory rates resulting in an effective
German tax rate of forty-six percent, which gives effect to the
deduction of the interest expense associated with the $20
million in acquisition related debt. In Germany, Phoenix Airbag
has merged into a limited liability partnership, which allows
for the pass through of all investment-related expenses incurred
by the partner. The pass through of these expenses results in a
permanent tax difference and the deduction of these expenses in
both the US and in Germany.
e) To reflect the implementation of Safety Components' accounting
policy for the depreciation of fixed assets from accelerated
methods to the straight-line method. In addition, Safety
Components' has changed the estimate of fixed assets' useful
lives from 3 to 5 years to 5 to 10 years. The aggregate credits
associated with this change are $160 for the three months ended
June 30, 1996 and $640 for the year ended March 31, 1996. The
amount of increased depreciation associated with the step-up in
fixed assets are $110 for the three months ended June 30, 1996
and $440 for the year ended March 31, 1996.
f) To reflect the anticipated increase in management, accounting,
finance and information systems associated with the acquisition
of Phoenix Airbag. These additional costs are anticipated to be
$125 for the three months ended June 30, 1996 and $450 for the
year ended March 31, 1996. These costs reflect management's best
estimates of the increased costs of staffing to operate Phoenix
Airbag.
7
<PAGE>
Note 2 - Pro Forma Adjustments for the Balance Sheet as of June 30, 1996:
a) To reflect purchase method of accounting for the acquisition of
Phoenix Airbag by Safety Components. The cumulative purchase
price of $22 million includes approximately $2 million of direct
acquisition costs (shown as a reduction in other assets on the
accompanying balance sheet). Management has allocated the
purchase consideration of Phoenix Airbag's assets at fair market
value, net of liabilities assumed, as follows in thousands:
<TABLE>
<CAPTION>
Historical Purchase Price Net Assets
Accounts Adjustments At Fair Value
---------- -------------- -------------
<S> <C> <C> <C>
Current assets $5,679 $ 137 $ 5,816
Plant and equipment 3,053 3,741 6,794
Intangible assets:
Patents 0 2,980 2,980
Goodwill 0 9,150 9,150
------ ------- -------
Total assets 8,732 16,008 24,740
Total liabilities 3,064 (419) 2,645
------ ------- -------
Net Assets $5,668 $16,427 $22,095
====== ======= =======
</TABLE>
Allocations of fair value to property and equipment, and patents
were based on independent appraisals obtained by the Company's
management. In addition, the Company, reduced certain accrued
warranty reserves of the predecessor entity totaling $419.
Management believes additional adjustments may impact the final
purchase price allocation, however, such adjustments are not
expected to be significant.
8
<PAGE>
EXHIBIT 99.1
[LOGO of BDO]
Short Form Audit Report
on the Financial Statement
of the
PHOENIX AG's AIRBAG DIVISION
for the year ended December 31, 1995
<PAGE>
[LOGO of BDO]
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Board of
Safety Components International
Costa Mesa, California
USA
Audit Opinion
We have audited the accompanying balance sheet of PHOENIX AG's Airbag Division
as of December 31, 1995 and the related statement of operations and a statement
of cash flow for the year then ended and the balance sheet as of December 31,
1994 as well as the revenues of 1994.
We have conducted our audit in accordance with foreign standards that are
substantially the same as United States Generally Accepted Auditing standards.
It included an examination of the underlying documentation of the PHOENIX AG's
Airbag Division and audit procedures we considered appropriate. The accounting
system was audited by us as the auditors of the PHOENIX AG earlier. In our
opinion on behalf of the annual accounts of PHOENIX AG for the year ended
December 31, 1995 we confirmed that the accounting principles comply with the
German legal requirements.
In our opinion the balance sheet of PHOENIX AG's Airbag Division as of December
31, 1995, expressed in Deutsche Mark, and the related statement of income and
cash flow 1995, and the balance sheet as of December 31, 1994 as well as the
revenues for the year ended December 31, 1994 as disclosed in the note 15
present fairly the financial position of the airbag division as of December 31,
1995 and comply with the accounting principles of the United States of America.
Hamburg, October 7, 1996
BDO Deutsche Warentreuhand
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
- ------------ -------------
(Dannenbaum) (ppa. Brandt)
<PAGE>
[LOGO OF BDO]
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Financial Statements of the year ended
December 31, 1995 of PHOENIX AG's Airbag Division
Balance Sheet
<TABLE>
<CAPTION>
December 31, December 31,
Notes 1995 1994
DM DM
----------------------------------------
<S> <C> <C> <C>
ASSETS
Current Assets
Inventories 3 3,913,485 2,463,787
--------------------------
Fixed Assets 4
Intangible fixed assets 25,712 51,760
Machinery and equipment 6,334,992 6,103,522
Assets under construction 301,557 0
--------------------------
6,662,261 6,155,282
--------------------------
10,575,746 8,619,069
==========================
LIABILITIES
Current account PHOENIX AG 8,849,226 9,320,799
Accruals 5 136,000 123,810
Deferred taxation 13 1,044,550 1,754,460
--------------------------
10,029,776 11,199,069
--------------------------
SHAREHOLDERS EQUITY/(DEFICIT) 6 545,970 (2,580,000)
--------------------------
10,575,746 8,619,069
==========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
[LOGO OF BDO]
-3-
Statement of Operations
and retained (deficit) earnings
<TABLE>
<CAPTION>
Note DM
--------------------------
<S> <C> <C>
1. Net Sales 7 43,015,600
2. Cost of Sales 8 (35,411,735)
-------------
3. Gross Profit 7,603,865
4. Research and development 9 (1,223,000)
5. Sales Expenses 10 (1,038,000)
6. General and administrative Expenses 11 (1,568,300)
-------------
7. Profit before interest and taxes 3,774,565
8. Interest 12 0
9. Taxes 13 (648,595)
-------------
10. Net income 3,125,970
11. Retained deficit at the beginning of the
year (2,580,000)
-------------
12. Retained earnings at the end of the year 545,970
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
[LOGO OF BDO]
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Cash Flow Statement
for the twelve months ended
December 31, 1995
<TABLE>
<CAPTION>
DM
-----------
<S> <C>
Net income 3,125,970
plus depreciation on fixed assets 2,372,055
changes in current assets and liabilities
Inventories (1,449,698)
Accruals 12,190
Deferred taxes (709,910)
-----------
Net cash provided by operating activities 3,350,607
Capital expenditures = Net cash used in
investing activities (2,879,034)
-----------
471,573
Repayment of current account PHOENIX AG (471,573)
-----------
Cash at end of the year 0
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
[Logo of BDO]
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Notes to the accounts
1. Description of Business
The production of sewn airbag was a division of PHOENIX AG in Hildesheim
during the years 1994 and 1995. PHOENIX AG started to produce sewn airbags
in 1994 to replace the gummed airbags.
With a founding contract dated November 14, 1995, and with effect from
January 1, 1996, PHOENIX AG transferred its airbag production into a
separate legal entity called Phoenix Airbag GmbH. Phoenix Airbag was
subsequently sold under a contract dated June 6, 1996 and amended on June 28
and August 6, 1996, with effect from January 1, 1996 to a subsidiary of
Safety Components Inc.
2. Significant Accounting Principles
The financial Statements have been prepared in accordance with Generally
Accepted Accounting Principles of the United States of America. The
particular accounting principles adopted are described below.
Due to the fact that the sewn airbag production was only a division within
the PHOENIX AG's business, the balance sheet only includes those assets and
liabilities/accruals which relate directly to the airbag production. Neither
trade debtors nor creditors to suppliers are included.
The financial statements have been prepared under the historical cost
convention and are expressed in German Marks (DM).
The airbag division is potentially subject to a concentration of credit risk
consisting of its trade receivables, relying only on two domestic customers
(Petri AG, MST Automative GmbH).
The financial statements have been prepared in conformity with Generally
Accepted Accounting Principles of the United States of America, which
required management to make estimates and assumptions that effect the
amounts and
<PAGE>
[LOGO of BDO]
-6-
disclosures reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
All overheads, general and administrative expenses are allocated to the
airbag division based on reasonable cost accounting principles.
3. Inventories
Inventories as of December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
December 31 December 31
----------- -----------
1995 1994
---- ----
DM DM
-- --
<S> <C> <C>
Raw materials, tools 1,168,699 751,383
Unfinished goods 1,213,925 489,947
Finished goods 1,530,861 1,222,457
--------- ---------
3,913,485 2,463,787
========= =========
</TABLE>
Inventories are valued at the lower of cost or market value net of adequate
provisions for obsolete inventories. Raw materials are valued at weightened
average cost. Unfinished and finished goods are valued at full absorption
costing.
4. Fixed assets
<TABLE>
<CAPTION>
December 31 December 31
----------- -----------
1995 1994
---- ----
DM DM
-- --
<S> <C> <C>
Intangible fixed assets
At cost 257,108 254,563
less accumulated depreciation (231,396) (202,803)
----------- ----------
25,712 51,760
=========== ==========
</TABLE>
<PAGE>
[LOGO OF BDO]
-7-
Tangible fixed assets
<TABLE>
<CAPTION>
December 31 December 31
1995 1994
---- ----
DM DM
---- ----
<S> <C> <C>
At cost
Machinery and equipment 11,692,525 9,328,091
Furniture, fixtures and office
equipment 1,222,771 1,051,810
Assets under construction 301,557 0
---------- ----------
13,216,853 10,379,901
---------- ----------
Accumulated depreciation
Machinery and equipment 5,762,734 3,614,890
Furniture, fixtures and office
equipment 817,570 661,489
---------- ----------
6,680,304 4,276,379
---------- ----------
Net book value 6,636,549 6,103,522
========== ==========
</TABLE>
Fixed assets are stated at cost less accumulated depreciation. Depreciation
is provided using the reducing-balance method, applied over the expected
useful life of assets five to ten years. Machinery and equipment is
generally depreciated over a period of ten years. Low value items up to DM
800 are depreciated 100% during the period of acquisition.
Additions and improvements are capitalized, maintenance and repairs are
expensed when incurred.
5. Accruals
Accruals consist of pension obligation, valued according to German tax
requirements (DM 53,000) and other obligations to employees (DM 83,000).
<PAGE>
[LOGO OF BDO]
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6. Shareholders Equity
Shareholders equity includes only retained earnings (deficit). All
investments by PHOENIX AG have been netted by the current account.
7. Sales
Sales include only the production of sewn airbag.
<TABLE>
<CAPTION>
DM
--
<S> <C>
Gross sales less VAT 43,350,700
Discounts 335,100
----------
43,015,600
==========
</TABLE>
8. Cost of sales
<TABLE>
<CAPTION>
DM
--
<S> <C>
Material 21,379,000
Wages 8,988,060
Depreciation of fixed assets 2,372,055
Sundry costs 2,672,620
----------
35,411,735
==========
</TABLE>
Sundry costs consist of overheads such as rent for the plant, repair and
maintenance, auxiliary material, energy, proportion of production
management and other services.
9. Research and development
<TABLE>
<CAPTION>
DM
--
<S> <C>
Direct costs of airbag 781,000
Proportion of facilities provided by the
central department 442,000
---------
1,223,000
=========
</TABLE>
<PAGE>
[LOGO of BDO]
-9-
10. Sales expenses
<TABLE>
<CAPTION>
DM
--
<S> <C>
Wages and salaries 334,000
Freight and packaging 519,000
Warehouse 180,000
Sundry 5,000
---------
1,038,000
=========
</TABLE>
11. General and administrative expenses
<TABLE>
<CAPTION>
DM
--
<S> <C>
General overheads allocated
to the airbag division
such as
managing director of airbag
itself 231,000
proportion of PHOENIX AG's
management 347,000
purchase department 132,000
finance, cost- and
controlling department 252,000
insurance 132,000
duties 133,000
logistic and restructure
department 136,000
other internal and external
services 205,300
---------
1,568,300
=========
</TABLE>
12. Interest
No interest are allocated to the airbag division.
<PAGE>
[LOGO OF BDO]
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13. Taxes
The Income tax charges are calculated as if the airbag division was already
a separate legal entity in 1995 and 1994.
The tax charges comprise corporation tax and municipal trade tax on income.
Municipal trade tax is a deductible expense for corporation profits tax
purposes. The effective rate for municipal trade tax was 17% in 1995. The
standard rate of corporation tax is 45% of taxable income. This rate will
be reduced to 30% for distributed profits. In consistency with the
assumption of the period January to July 1996 the corporation tax was
calculated using the standard rate.
The net operating loss of 1994 (DM 2,580,000) was netted against pre tax
income of 1995.
Deferred taxes at a rate of 54.4% income taxes were accrued for special
depreciations on fixed assets allowed according to German fiscal law for
investments in the region along the former border to the Deutsche
Demokratische Republik.
<TABLE>
<CAPTION>
DM
--
<S> <C>
Current income tax 1995 1,358,505
less reduction of deferred taxes (709,910)
---------
648,595
---------
</TABLE>
14. Contingent liabilities and commitments
As of December 31, 1995 and 1994 there were no contingent liabilities and
commitments.
<PAGE>
[LOGO OF BDO]
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15. Results of operations of PHOENIX AG's Airbag Division for the year ended
December 31, 1994
The following information for the year ended December 31, 1994 includes the
audited revenues and unaudited costs of the airbag product line of
Phoenix's parent, PHOENIX AG. Costs for 1994 have been included for
informational purposes and are unaudited since the airbag division was in
the process of being established and the organizational structure was not
designed to segregate costs between product lines. Costs for 1994 are based
on the internal operating statements of PHOENIX AG. Included in costs are
certain adjustments made by management to allocate common expenditures
utilized by the various product lines located in PHOENIX AG's Hildesheim
facility.
<TABLE>
<CAPTION>
Year ended
December 31, 1994
DM (000)
--------
<S> <C>
Revenues (audited) 19,718
Costs (unaudited)
Cost of sales (18,763)
Research and development ( 1,559)
Selling, general and administrative ( 2,010)
Other ( 56)
-------
Income before income taxes ( 2,580)
Provision for income taxes 0
-------
Net income ( 2,580)
</TABLE>
<PAGE>
GENERAL CONDITIONS OF ASSIGNMENT
for
WIRTSCHAFTSPRUFER AND WIRTSCHAFTSPRUFUNGSGESELLSCHAFTEN
1st JANUARY 1995
1. SCOPE AND APPLICATION
(1) These conditions are applicable to agreements between Wirtschaftsprufer
or Wirtschaftsprufungsgesellschaften (hereafter uniformly referred to as
"Wirtschaftsprufer") and their clients concerning audits, advisory work and any
other services, as far as these are not otherwise expressly agreed in writing or
providing for by non-discretionary legal regulations.
(2) If, in exceptional cases, contractual relations also exist between the
Wirtschaftsprufer and parties other than the client, the provisions of Section 9
below also apply to the relations with such parties.
2. SCOPE AND EXECUTION OF ASSIGNMENT
(1) The object of the Wirtschaftsprufer's assignment is the performance of
agreed services and not the achievement of a particular economic result. The
assignment is executed in accordance with generally accepted professional
standards. The Wirtschaftsprufer is entitled to use qualified persons to carry
out his assignment.
(2) The application of foreign law requires special written agreement, except
in cases of special investigations.
(3) The assignment does not extent--unless expressly stated otherwise--to an
examination of due adherence to tax laws or special regulations, e.g. to the law
of price control, laws of limitation of competition and other controls; the same
applies to determination as to whether grants, allowances or benefits of any
other type may be claimed. The execution of an assignment includes only the
application of auditing procedures aimed at the disclosure of bookkeeping frauds
and other irregularities if during the performance of the audit such requirement
becomes apparent, or if this has been expressly agreed in writing.
(4) If the legal position changes after the final professional pronouncement
by the Wirtschaftsprufer, he is not obliged to inform the client of the changes
or any resulting consequences. This provision also applies to parts of the
assignment which are already completed.
3. INFORMATION TO BE GIVEN BY THE CLIENT
(1) The client has to see that the Wirtschaftsprufer even without his specific
request is supplied in good time with all the documentary evidence necessary for
the execution of the assignment and informed of all events and circumstances
which may have a bearing on the execution of the assignment. This also applies
to any evidence, events and circumstances which come to light during the course
of the Wirtschaftsprufer's work.
(2) Upon request of the Wirtschaftsprufer, the client must confirm in a
written statement formulated by the Wirtschaftsprufer that the evidence,
information and explanations supplied are complete.
4. SAFEGUARD OF INDEPENDENCE
The client undertakes to ensure that no action is committed which might endanger
the independence of the Wirtschaftsprufer's staff. This applies especially to
offers of employment and offers to perform professional work on the staff
member's own account.
5. REPORTING AND ORAL INFORMATION
If the Wirtschaftsprufer is obligated to present the results of his work in
writing, only that written presentation is authoritative and binding. In the
case of audit assignments the report is, unless otherwise agreed, submitted in
writing. Oral explanations and information given by the staff of the
Wirtschaftsprufer outside the scope of the assignment are never binding.
6. PROTECTION OF THE WIRTSCHAFTSPRUFER'S INTELLECTUAL PROPERTY
The client warrants that special opinions, organization plans, drafts, sketches,
tabulations and calculations, particularly quantity and cost computations,
prepared by the Wirtschaftsprufer within the scope of the assignment, are only
used for his purposes.
7. RELEASE OF A WIRTSCHAFTSPRUFER'S PROFESSIONAL STATEMENT TO THIRD PARTIES
(1) The release to third parties of professional statements made by the
Wirtschaftsprufer (reports, special opinions, etc.) requires the
Wirtschaftsprufer's written consent, unless the terms of the assignment allow
release thereof to a designated person.
As to third parties, the Wirtschaftsprufer is liable (within the limits of
Section 9) only if the prerequisites of sentence 1 are satisfied.
(2) The use for advertising purposes of professional statements made by the
Wirtschaftsprufer is not permitted; any infringement entitles the
Wirtschaftsprufer to instant termination of all assignments not yet completed
for the client.
8. CORRECTION OF DEFICIENCIES
(1) The client is entitled to have deficiencies in the Wirtschaftsprufer's work
corrected. Only if the correction fails may the client also claim a reduction of
fees or cancellation of the contract. If the assignment has been awarded by a
merchant within the scope of his commercial activities, by a public-law legal
entity or by a public-law fund, the client can only claim cancellation of the
contract if the Wirtschaftsprufer's work, because of the failure in correcting
the deficiency, is of no interest to the client.
Claims for additional compensation are dealt with under Section 9.
(2) The client must submit his claim for correction of deficiencies in writing
without delay. Claims under Paragraph (1) sentence 1 expire six months after
completion of the Wirtschaftsprufer's professional work.
(3) Obviously errors, such as typing and arithmetical errors and deficiencies
of form contained in a Wirtschaftsprufer's professional statements (report,
special opinion, etc.) may be corrected by the Wirtschaftsprufer at any time
also with effect against third parties. Errors which are apt to question the
results contained in the Wirtschaftsprufer's professional statements, entitle
the Wirtschaftsprufer to withdraw such statements also with effect against any
third party. In such cases the Wirtschaftsprufer should, if practicable, first
hear the client.
9. LIABILITY
(1) With regard to audits required by law, the liability limitations set out in
(S)323 par. (2) Commercial Code apply.
(2) Liability in cases of negligence; Single cases of damages
Pursuant to (S)54a par. (1) no. 2 Law regulating the Profession of
Wirtschaftsprufer (WPO) the liability of the Wirtschaftsprufer for damages of
any kind, whether it is joint or several liability, is limited in a single case
of damages due to negligence to DM 2 million; this limitation also applies to
liability to a person other than the client. A single case of damages is defined
as the total sum of the damages claims of all persons entitled to claim, which
arise from one and the same professional error (offence); a single case of
damages is also defined as the total of all offences committed in performing an
audit or other coherent service (a specifiable professional service which
technically represents an undivisible performance) by one or more persons.
However, in the case of damages suffered from several audits of the same kind or
several coherent services of similar nature a Wirtschaftsprufer can be held
liable only up to an amount of DM 2.5 million irrespective of whether the
damages were caused by offences within one year or within several consecutive
years.
(3) Limitation periods
A damages claim may only be lodged within twelve months of the claimant becoming
aware of the damages and of the event constituting the claim, at the very
latest, however, within 5 years following the event constituting the claim. The
claim expires unless legal action is taken within six months following the
written refusal of acceptance of the correction and the client was informed of
this consequence. The right to apply the statute of limitations is not
prejudiced. This paragraph (3) applies equally to audits required by law with
legally-imposed liability limitations.
<PAGE>
10. Supplementary provisions relating to audits
(1) A subsequent amendment or abridgement of the audited and certified financial
statements or management report requires the written consent of the
Wirtschaftsprufer even if these documents are not published. In cases where the
Wirtschaftsprufer has not issued an audit opinion, reference to the
Wirtschaftsprufer's examination may only be made in the management report or
other publications with his written consent and then only with a wording
authorized by him.
(2) If the Wirtschaftsprufer revokes his opinion, it must no longer be used. If
the client has already made use of the opinion, he must announce its revocation
upon the request of the Wirtschaftsprufer.
(3) The client is entitled to 5 copies of the report. Additional copies are
charged for separately.
11. Supplementary provisions relating to tax advisory services
(1) When advising the client on a particular tax problem or when furnishing
continuous tax advice, the Wirtschaftsprufer is entitled to assume that the
facts, especially figures, provided by the client, are complete and correct;
this also applies to bookkeeping assignments. He is, however, obliged to inform
the client of any errors discovered by him.
(2) The assignment for tax advisory services does not comprise those services
required for meeting deadlines, except in cases where the Wirtschaftsprufer has
specifically accepted such assignment. In such cases the client must supply the
Wirtschaftsprufer with all documents essential for meeting deadlines, especially
with tax assessments, with sufficient time for the Wirtschaftsprufer to give
them adequate attention.
(3) In the absence of other written agreements, a continuous tax advice
assignment covers the following work arising during the period of the agreement:
a) preparation of the annual income, corporation and trade tax returns as
well as property tax returns on the basis of financial statements and
other records and evidence required for tax purposes, to be submitted by
the client
b) review of assessments concerning the taxes mentioned in (a)
c) negotiations with the tax authorities with regard to the returns and
assessments mentioned in (a) and (b)
d) participation in tax audits and evaluation of the results of tax audits
concerning the taxes mentioned in (a)
e) participation in appeals and complaints filed with the Fiscal Authorities
("Einspruchsverfahren" and "Beschwerdeverfahren"), concerning the taxes
mentioned in (a).
When undertaking the aforementioned work the Wirtschaftsprufer takes into
account major published legal decisions and the administration's opinion.
(4) In cases where the Wirtschaftsprufer receives a retainer fee for continuous
advice, the work mentioned in paragraph 3(d) and (e) is chargeable separately
unless otherwise agreed in writing.
(5) A special agreement is required to engage the Wirtschaftsprufer's services
on particular individual problems with regard to income, corporation and trade
tax, the valuation procedures for property taxation, property tax, as well as
all problems concerning turnover tax, wages tax and any other taxes and dues.
This also applies to:
a) the treatment of non-recurring tax matters, e.g. in the field of estate
tax, capital transactions tax, real estate acquisition tax
b) participation and representation in proceedings before tax and
administrative courts and in criminal proceedings concerning taxes, and
c) granting of advice and expert opinions in connection with conversions,
mergers, capital increases and reductions, financial reorganizations,
admission and retirement of partners or shareholders, sale of businesses,
liquidations and similar matters.
(6) If, in addition to the above, the Wirtschaftsprufer is requested to prepare
the annual turnover tax return, he is not obligated to examine adherence to
special accounting requirements, if any, or to determine whether the client has
taken full advantage of all benefits offered under the turnover tax law. No
guarantee is assumed for the completeness of the evidence complied in
substantiation of the credit against the client's turnover tax liability for his
suppliers' turnover tax charge.
12. Professional discretion towards third parties and data protection
(1) The Wirtschaftsprufer is, as provided by law, obligated to treat all matters
which come to his knowledge in connection with his engagement as confidential,
irrespective of whether these matters concern the client himself or his business
connections, unless the client releases him from this obligation.
(2) The Wirtschaftsprufer is not allowed to release reports, special opinions
and other written statements on the results of his work to third parties without
the consent of his client.
(3) The Wirtschaftsprufer is entitled -- within the framework of his assignment
- -- to process personal data made available to him or to authorize third parties
to process them.
13. Default of acceptance and lack of co-operation on the part of the client
If the client is in default of accepting the services offered by the
Wirtschaftsprufer or if the client refrains from the co-operation incumbent on
him in accordance with Section 3 or otherwise, the Wirtschaftsprufer is entitled
to terminate the agreement without notice. The right of the Wirtschaftsprufer to
compensation of additional expenses as well as damages caused default or by the
client's failure to co-operate is not prejudiced, even if the Wirtschaftsprufer
does not exercise his right to terminate the agreement.
14. Remuneration
(1) In addition to his fees or remuneration, the Wirtschaftsprufer is entitled
to reimbursement of his expenses; the value added tax is billed separately. He
may request appropriate advances on account of remuneration and expenses and may
withhold the results of his services until full payment of his claims has been
made. If there is more than one client, they are jointly and severally liable.
(2) Any set off against claims of the Wirtschaftsprufer for remuneration and
reimbursement of expenses is only permitted in the case of undisputed or legally
settled claims.
15. Storage and return of documentation
(1) The Wirtschaftsprufer shall retain, for a period of seven years, the
documents handed over to him or prepared by himself in connection with the
performance of the assignment as well as the correspondence concerning the
assignment.
(2) After settlement of his claims arising from the assignment, the
Wirtschaftsprufer, on request of the client, has to return all documents
obtained from the client or from a third party on his behalf by reason of his
assignment. This does not, however, apply to correspondence exchanged between
the Wirtschaftsprufer and his client and to any documents of which the client
already has the original or a copy. The Wirtschaftsprufer is entitled to prepare
and retain copies or photocopies of any documents which he returns to the
client.
16. Applicable law
(1) The assignment of the Wirtschaftsprufer, the execution of the assignment and
the resulting claims are solely governed by German law.
<PAGE>
EXHIBIT 99.3
Phoenix Airbag GmbH & Co. KG
Financial Statements
For The Period
August 6, 1996 Through December 31, 1996
<PAGE>
[Price Waterhouse Logo]
To the Board of Directors
Safety Components International, Inc.
Costa Mesa, California
United States of America
Report of Independent Accountants
1. We have audited the accompanying balance sheet of Phoenix Airbag GmbH & Co.
KG, Hildesheim (a German limited liability partnership in Germany) expressed
in Deutsche Mark as of December 31, 1996 and the related statements of
operations, of stockholders' equity and of cash flows for the period from
August 6, 1996 to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
2. We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
3. In our opinion, the financial statements audited by us present fairly, in all
material respects, the financial position of Phoenix Airbag GmbH & Co. KG,
Hildesheim, as of December 31, 1996 and the results of its operations and its
cash flows for the period from August 6, 1996 to December 31, 1996, in
conformity with generally accepted accounting principles in the United States
of America.
Price Waterhouse GmbH
Hamburg, June 3, 1997
<PAGE>
Phoenix Airbag GmbH & Co. KG
Balance Sheet
December 31, 1996
<TABLE>
<CAPTION>
DM
----------
<S> <C>
Assets
- ------
Current assets:
Cash and cash equivalents 6,563,923
Accounts receivable (Note 2) 5,081,775
Inventories (Notes 2 and 3) 2,229,400
Prepaids and other current assets 14,343
----------
Total current assets 13,889,441
Plant and equipment, net (Notes 2 and 3) 13,218,790
Intangible assets (Notes 2 and 3) 18,583,035
----------
Total Assets 45,691,266
==========
Liabilities and Owner's Capital
- -------------------------------
Current liabilities:
Accounts payable 490,072
Amounts payable to owner (Note 4) 4,569,130
Accrued liabilities (Note 3) 2,794,221
Current portion of obligations under capital lease (Note 5) 424,886
----------
Total current liabilities 8,278,309
Obligations under capital lease, net of current portion (Note 5) 2,047,119
Deferred income taxes payable 350,000
Note payable to owner (Note 4) 24,895,728
----------
Total liabilities 35,571,156
----------
Commitments and contingencies (Note 7)
Owner's capital (Note 1):
Capital contribution 8,146,860
Cumulative undistributed earnings 1,973,250
----------
Total owner's capital 10,120,110
----------
Total liabilities and owner's capital 45,691,266
==========
</TABLE>
See notes to financial statements.
<PAGE>
Phoenix Airbag GmbH & Co. KG
Statement of Operations and Retained Earnings
For the Period
August 6, 1996 Through December 31, 1996
<TABLE>
<CAPTION>
DM
----------
<S> <C>
Net Sales 23,214,102
Cost of sales 17,146,079
----------
Gross profit 6,068,023
Selling, general and administrative expenses 1,778,385
Amortization expense (Notes 2 and 3) 300,200
----------
Operating income 3,989,438
Foreign currency transaction loss (Note 2) 931,510
Interest expense, net of interest income (Note 4 and 5) 734,678
----------
Income before income taxes 2,323,250
Provision for income taxes (Note 2 and 6) 350,000
----------
Net income 1,973,250
Retained earnings beginning of period ---
----------
Retained earnings end of period 1,973,250
==========
</TABLE>
See notes to financial statements.
<PAGE>
Phoenix Airbag GmbH & Co. KG
Statement of Cash Flows
The Period August 6, 1996 Through December 31, 1996
<TABLE>
<CAPTION>
DM
-----------
<S> <C>
Cash flows from operating activities:
Net income 1,973,250
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 574,594
Amortization 300,200
Foreign currency transaction loss (Note 2) 931,510
Changes in operating assets and liabilities:
Accounts receivable 1,187,871
Inventories (145,223)
Prepaids and other current assets (14,249)
Accounts payable (1,396,640)
Accrued liabilities (139,594)
Deferred income taxes 350,000
----------
Net cash provided by operating activities 3,621,719
----------
Cash flows from investing activities:
Additions to plant and equipment (1,641,677)
Cash received from Phoenix AG for advances (Note 4) 1,813,931
----------
Net cash provided by investing activities 172,254
----------
Cash flows from financing activities:
Proceeds from sale-leaseback of equipment (Note 5) 2,505,973
Payment on capital lease obligation (33,969)
Payment on note payable to owner (Note 4) (455,148)
Additions in obligations due to owner (Note 4) 752,664
----------
Net cash provided by financing activities 2,769,520
----------
Change in cash and cash equivalents 6,563,495
Cash and cash equivalents, beginning of period 428
----------
Cash and cash equivalents, end of period 6,563,923
==========
Supplemental disclosure of cash flow information:
Cash paid during the period for -
Interest 538,730
==========
Supplemental Information of Noncash Transactions - See Note 8.
</TABLE>
See notes to financial statements.
<PAGE>
Phoenix Airbag GmbH & Co. KG
Notes To The Financial Statements
December 31, 1996
1. Description of Business and Basis of Presentation
Phoenix Airbag GmbH & Co. KG (the "Company") currently supplies driver side,
passenger side and side impact airbags to two major European airbag systems
suppliers for inclusion in various vehicle models manufactured by several
European automobile manufacturers, including Mercedes, BMW, Audi, Opel,
Volkswagen and Porsche. The Company operates a highly automated
manufacturing facility located in Hildesheim, Republic of Germany. In
addition to manufacturing airbags, the Company is involved in research and
development relating to the design of new airbag products.
The Company currently operates as a GmbH & Co. KG, a limited liability
partnership in Germany. This status allows the Company certain tax and legal
advantages. On April 28, 1997, retroactive to August 6, 1996, the Phoenix
Airbag GmbH merged into the Phoenix Airbag GmbH & Co. KG. The merger was
accounted for at historical cost (carryover basis), in a manner similar to a
pooling of interests. Since Automotive Safety Components International, Inc.
("ASCI"), in substance, controls the financial and operational decisions of
the Company, receives 100% of the profits and losses and assumes all the
financial risks and rewards of the Company (see acquisition below),
management has reported the ASCI partnership interest as "owner's capital"
in the accompanying balance sheet. Accordingly, the seller's interest in the
partnership is not reflected in the accompanying financial statements.
Acquisition
On August 6, 1996, ASCI acquired eighty percent of the outstanding capital
stock of Phoenix Airbag GmbH ("Phoenix Airbag"). Phoenix Airbag was a
corporation organized under the laws of the Republic of Germany, and at the
time of the acquisition, was a wholly owned subsidiary of Phoenix
Aktiengesellschaft ("Phoenix AG") in Hamburg, Germany. The purchase from
Phoenix AG was made in accordance with the terms and conditions of the
Agreement Concerning the Sale and Transfer of all the Shares in Phoenix
Airbag GmbH ("Stock Purchase Agreement") dated June 6, 1996, as amended.
Pursuant to the Stock Purchase Agreement, eighty percent of Phoenix AG's
interest in the Company was acquired for an initial purchase price of DM 31
million, subject to a net worth adjustment which decreased the initial
purchase price by DM 3 million. Additional purchase consideration of up to
approximately DM 11.5 million for the remaining twenty percent interest is
contingent on the Company meeting certain performance targets during
calendar years 1996 through 1998. If the annual targets are met, payments
are to be paid annually commencing April 30, 1997. The Company met its
performance target for calendar 1996, and ASCI paid its first contingent
purchase price payment DM 3.8 million. Accordingly, the Company accrued such
repayment to ASCI in the accompanying balance sheet. If the remaining
performance targets are not met, ASCI would acquire the remaining twenty
percent without the payment of any additional consideration. Additionally,
ASCI may, under certain circumstances, be required to provide a bank
guaranty to Phoenix AG, in August 1997, to secure the payment of up to
approximately DM 7.7 million of the contingent purchase price.
Page 1
<PAGE>
The acquisition of the Company by ASCI is reflected using the purchase
method of accounting. Although ASCI will acquire the remaining twenty
percent interest effective December 31, 1998, it is entitled to 100% of the
income or losses, risks and rewards of the Company commencing August 6,
1996. Accordingly, all assets and liabilities were reflected at fair value
at the date of acquisition, and no minority interest was recorded in the
Company's balance sheet for Phoenix AG's remaining twenty percent interest.
Through December 31, 1996, the cumulative purchase price amounted to DM 36.4
million, including DM 4.6 million of direct acquisition costs. Management of
the Company allocated the purchase consideration for Phoenix Airbag assets
at fair market value, net of liabilities assumed, as follows:
<TABLE>
<CAPTION>
Historical Purchase Net Assets,
Accounts Price At Fair Value
August 5, 1996 Adjustments August 6, 1996
--------------- ------------ ---------------
(DM) (DM) (DM)
<S> <C> <C> <C>
Current assets- 8,723,893 1,491,883 10,215,776
Plant and equipment 6,683,481 5,411,137 12,094,618
Patents - 4,418,000 4,418,000
Goodwill - 14,465,235 14,465,235
Other 12,298 - 12,298
---------- ---------- ----------
Total assets 15,419,672 25,786,255 41,205,927
Current liabilities - 7,602,212 (2,800,192) 4,802,020
Long-term liabilities - 752,096 (752,096) -
---------- ---------- ----------
Net assets 7,065,364 29,338,543 36,403,907
========== ========== ==========
</TABLE>
Allocations of fair value to property and equipment, and patents were based
on independent appraisals obtained by the Company's management and owner. In
addition, the Company, through tax planning, reduced certain tax liabilities
of the predecessor entity totaling DM 2.8 million. Management believes
additional adjustments may impact the final purchase price allocation,
however, such adjustments are not expected to be significant. See Note 4 for
discussion of the note payable issued to the owner for cash paid by ASCI to
acquire the Company.
2. Significant Accounting Policies
General
The Company maintains its books and records and prepares its financial
statements in Deutsche Mark ("DM") and in accordance with generally accepted
accounting principles in Germany. Certain adjustments and reclassifications
were made to present the Company's financial statements in conformity with
generally accepted accounting principles in the United States of America.
Page 2
<PAGE>
Use of estimates
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition
Sales are recognized at the time when goods are shipped, net of discounts
granted and Value Added Tax (VAT).
Concentration of credit risk
The Company's sales are concentrated in few customers. During the period
ended December 31, 1996, the Company had sales to two customers which
accounted for approximately 77% and 22% of total sales, respectively. The
loss of any one of these customers could have an adverse effect on the
Company's operations.
The Company is subject to concentrations of credit risk consisting of its
trade accounts receivable, two customers of which account for approximately
69% and 29%, respectively of such at December 31, 1996. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential loss on
uncollectible accounts and such losses have historically been within
management's expectations. At December 31, 1996, reserves for uncollectible
accounts were not significant.
Inventories
Inventories represent direct labor, materials and overhead costs incurred for
products yet to be delivered and are stated at the lower of cost (weighted
average) or market.
Plant and equipment
Plant and equipment are stated at cost. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of
the assets, which range from three to ten years.
Expenditures for repairs and maintenance are charged to expense as incurred.
Renewals or betterments of significant items are capitalized. When assets are
sold or otherwise disposed of, the cost and related accumulated depreciation
and/or amortization are removed from the respective accounts and any resulting
gain or loss is recognized.
Page 3
<PAGE>
Intangible assets
Intangible and other assets consist of goodwill and patents (see Notes 1 and
3) associated with the acquisition of Phoenix Airbag GmbH and are stated at
cost less accumulated amortization. Goodwill and patents are amortized over
the expected periods to be benefited, which have been determined to be 25
years.
The Company assesses the recoverability of intangible assets by determining
whether the amortization of the balances over its remaining life can be
recovered through projected undiscounted cash flows. The amount of
impairment, if any, will be measured based on projected undiscounted cash
flows and will be charged to operations in the period in which impairment is
determined by management. The methodology that management is expected to use
to project results of operations will be based on a five-year trend line of
expected cash flows.
Foreign currency translation
The Company follows the principles of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation", ("FAS 52") in accounting for
its note payable to ASCI (Note 4) denominated in US dollars and translated
into Deutsche Marks for financial statement reporting purposes. The
translation of this note payable into US dollars is reflected in operations.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under the liabilities method specified by FAS 109, deferred tax assets
and liabilities are measured each year based on the difference between
financial statement and tax bases of assets and liabilities at the applicable
enacted tax rates. Additionally, a valuation allowance is recorded for that
portion of deferred tax assets for which it is more likely than not that the
assets will not be realized.
Cash equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
Page 4
<PAGE>
3. Composition of Certain Balance Sheet Components
<TABLE>
<S>
Inventories: <C>
Raw materials 459,000
Work-in-process 1,338,000
Finished goods 432,400
---------
2,229,400
=========
Plant and equipment:
Machinery and equipment 9,680,649
Assets under capital lease 2,505,973
Furniture and fixtures 1,606,762
----------
13,793,384
Less accumulated depreciation and amortization (574,594)
----------
13,218,790
==========
Intangible assets:
Patents 4,418,000
Goodwill 14,465,235
----------
18,883,235
Less accumulated amortization (300,200)
----------
18,583,035
==========
Accrued liabilities:
Accrued salaries and related benefits 1,274,271
Accrued income taxes payable 691,808
Accrued VAT payable 466,142
Other 362,000
----------
2,794,221
==========
</TABLE>
4. Related Party Transactions
The owner, and its affiliates, of the Company provides certain management
and administrative services, as well as provides goods and services to the
Company on a monthly basis. For the period August 6, 1996 through December
31, 1996, these charges were not significant.
The amounts payable to owner at December 31, 1996, consist of interest
payable on the note payable to the owner (see following paragraph), and
additional purchase price consideration (Note 1) aggregating DM 3,816,466
paid by ASCI to Phoenix AG.
In association with the acquisition of the Company, a demand note was issued
by the Company to ASCI for approximately DM 25 million of the total purchase
price of DM 36.4 million (Note 1). This demand note, which is payable in
United States dollars, bears interest at the rate of 7.16 percent per annum.
Management of ASCI has waived its rights to demand repayment of such note
during calendar 1997 and, accordingly, such indebtedness is classified as
noncurrent in the accompanying balance sheet. Interest expense during the
period August 6, 1996 to December 31, 1996 amounted to DM730,000.
Prior to the acquisition, the Company had made certain advances to Phoenix
AG which were repaid during the period ended December 31, 1996 as reflected
in the statement of cash flows.
Page 5
<PAGE>
5. Obligations Under Capital Lease
As of December 31, 1996, the Company entered into a sale-leaseback of
certain equipment which is accounted for as a capital lease. The Company
received proceeds (which approximated the carrying value of the asset at the
tine of sale) of DM 2,505,973; no gain or loss was recorded in connection
with this transaction. The agreement requires sixty monthly payments of DM
50,997 and that specified machinery and equipment used in the Company's
operations be pledged as collateral, among other things. The Company imputed
interest at nine (9) percent per annum. Future minimum annual principal
payments over the next five years are DM 425,000, DM 445,000, DM 487,000, DM
532,000 and DM 583,000, respectively.
6. Income Taxes
In Germany, tax assessments do not become final until the accounting records
tax returns for the periods concerned have been examined by the tax
authorities. These reviews by the tax authorities have to be carried out
within five years after the year of assessment.
Partnerships in Germany are only subject to municipal trade tax on income.
Their taxable income is divided among the partners, who then become subject
to corporation tax or to income tax (if an individual).
A foreign partner will be deemed to be conducting business in Germany
through a permanent establishment, and that partner's profit share will be
taxed as though it were permanent establishment income. A second trade tax
does, however, not ensue, and the corporation tax rate is a flat 42 percent,
regardless of whether the profits are subsequently repatriated or merely
credited to the partner's current account in the partnership. There is no
dividend withholding tax or similar levy.
The provision for income taxes is prepared on a "separate tax return" basis.
The deferred income tax charge for the period from August 6, 1996 through
December 31, 1996 is comprised of municipal trade tax on income. The
effective rate for municipal trade tax on income in 1996 was 17.5 percent.
Accordingly, the Company does not accrue for any income tax (i.e.
corporation tax) for which the partner is liable.
The provision for income taxes for the period August 6, 1996 through
December 31, 1996 have been calculated as if the period constituted a
relevant fiscal period.
Deferred taxes at the rate of 17.5 percent have been provided primarily for
accelerated depreciation and amortization resulting from different
depreciation methods.
The Provision for income taxes for the period August 6, 1996 through
December 31, 1996 consisted of the following:
<TABLE>
<S> <C>
Current income taxes ---
Deferred income taxes 350,000
-------
Total tax provision for the period 350,000
=======
</TABLE>
Page 6
<PAGE>
7. Commitments and Contingencies
Operating leases
The Company has a noncancelable operating lease for office and manufacturing
space with Phoenix AG that expires on or before December 31, 2001. The
Company incurred rent expense of DM 245,700 for the period August 6, 1996
through December 31, 1996. Future minimum lease payments for this
noncancelable operating lease are as follows:
<TABLE>
<S> <C>
1997 590,000
1998 590,000
1999 590,000
2000 590,000
2001 590,000
---------
2,950,000
=========
</TABLE>
Legal proceedings
From time to time, the Company is the subject of legal proceedings for
various matters. Management believes there are no material claims currently
pending against the Company.
8. Cash Flow Information
The following are not included in the statement of cash flows: 1). In
connection with the acquisition of Phoenix Airbag, the Company issued an
interest bearing demand not in the amount of DM 25.2 million to ASCI, and
ASCI, through push-down accounting, contributed DM 8.1. 2). During the
period August 6, 1996 to December 31, 1996, the Company accrued DM 3.8
million for the first contingent purchase price payment reimbursable to ASCI
which was allocated to goodwill.
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